3 Major Challenges Plaguing Wal-Mart

REUTERS/Rick Wilking The world's largest retailer faces new challenges at a time when low prices and one-stop shopping can be a few clicks away on a tablet computer or mobile phone.

Wal-Mart Stores Inc. built its reputation on everyday low prices and convenient supercenters that allow customers to do all their shopping in one place.

But revenue at established Wal-Mart stores in the U.S., which account for 60 percent of the company's total sales, has declined for five consecutive quarters. Meanwhile, the number of customers has fallen six quarters in a row.

Like many other retail chains that cater to working-class Americans, Wal-Mart is a victim of an uneven economic recovery that has benefited well-heeled shoppers more than those in the lower-income rungs. Moreover, shoppers are no longer willing to spend hours in big supercenters. They're turning to online competitors like Amazon.com, dollar stores and pharmacies.

Wal-Mart's annual shareholders' meeting on Friday could offer clues as to how Doug McMillon, who became Wal-Mart's CEO in February, plans to deal with the biggest issues Wal-Mart faces:

CASH-STRAPPED SHOPPERS

In an interview with The Associated Press, Bill Simon, CEO and president of Wal-Mart's U.S. stores division, says the top concerns among its shoppers are lack of jobs and gas prices.

Wal-Mart's customers also still are struggling with a 2 percentage point increase in the Social Security payroll tax since Jan. 1, 2013. Additionally, they're facing reductions in government food stamp benefits.

As a result, Wal-Mart's customers have changed their shopping habits. They're switching to chicken from beef, and choosing lower-price brands or store labels on staples like detergent. But they do splurge for special holidays.

"It's been very choppy as to how they choose to spend," Simon says.

To combat this, Wal-Mart stocks up on small packages at the end of the month when money is tight for customers. It's also counting on a new money transfer service it says will cut fees for its low-income customers by up to 50 percent compared with similar services elsewhere.

But America's Research Group's C. Britt Beemer asks: "How do you get more money from shoppers whose disposable income is less?"

PRICE PRESSURE

Since the economic recovery, more stores are offering low prices, which has always been a centerpiece of Wal-Mart's success. As a result, Wal-Mart has had to focus more on cutting its prices.

The move seems to be working. According to a Kantar Retail pricing survey conducted last October in the southern New Hampshire and northern Massachusetts area, Dollar General's basket of 21 categories across staples was 12 cents cheaper at $28.70 than at Wal-Mart. In the previous year, Dollar General was 18 percent cheaper.

And in a separate study conducted a year ago, Amazon's prices on a basket of 59 items was actually 7 percent more expensive than Walmart.com and 16 percent pricier than at its supercenters.

Analysts also praise Wal-Mart's Savings Catcher, an online tool that allows customers to compare Wal-Mart's prices on thousands of products with those of some competitors. If a lower price is found elsewhere, Wal-Mart refunds the difference in the form of a store credit. Wal-Mart plans to expand the tool nationwide after having tested it in seven markets since March.

Still, low prices hurt sales and margins. For the latest quarter that ended on May 2, for instance, sales at Wal-Mart's U.S. stores that were open at least a year fell 0.1 percent.

CHANGING SHOPPING HABITS

Wal-Mart built tons of supercenters in the 1990s, but Americans increasingly are looking at physical stores as pick up locations after they've already searched online for goods. Or they're viewing them as places to make quick trips for bread and milk.

Wal-Mart's supercenters still account for 80 percent of its 4,000-plus U.S. stores, but the retailer is opening smaller outlets that cater to shoppers looking for more convenience. It now plans to open 270 to 300 small stores during the current fiscal year — double its initial forecast.

Meanwhile, Wal-Mart is shoring up its online business. It is testing online grocery delivery. And Wal-Mart more than doubled the number of items it sells online to more than 5 million last year. That helped global online sales increase 30 percent to $10 billion-plus for the latest fiscal year. The company now sells more than 7 million items online.